Finance cost relief on rental income

February 15, 2017 | Posted by Sonal Agarwal | Accounting, Business Advice, Taxation, Whitepapers,

finance cost relief

From April 2017, the Government are gradually introducing changes to finance cost relief. Up until now, if you were a landlord, you could deduct all your finance costs from your rental income to arrive at the property income chargeable for tax.

However, with effect from April 2017, the relief is now restricted to the basic rate of income tax.

What is finance cost?

This refers to specific finance costs related to your property income, and includes:

  • Interest on your mortgage on the rental property
  • Interest on loans to buy furnishings
  • Fees incurred when taking out or repaying mortgages or loans

In 2017/2018, the way your property income will be calculated is as follows:

Rents
Less: Expenses in relation to rental income, excluding finance costs
Less: 75% of finance costs
To arrive at: Property income chargeable to tax

On the remaining 25% finance cost, the basic rate of tax will be applied, and this figure will be deducted from your tax liability.

If the whole of your income is taxable at basic rate, this will have no effect on your tax bill. If you are a higher rate, or additional rate, tax payer, you will be getting tax relief only at basic rate on 25% of the finance costs borne by you.

The relief will be tapered, so by 2020, you will only receive basic rate tax relief on the whole of your finance costs.

If you would like to discuss how this impacts you in more detail, please contact us on 01256 406 601.

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